China may no longer be the sick man of Asia, but it is certainly the filthiest.

The country burns more coal than any other, and relies on the dirty black stuff for around 75 per cent of its energy needs. Despite recent hype over China’s newfound commitment to renewable energy, it could be a hundred years or more before it kicks its carbon addiction.

The reason for recent excitement about the “greening” of China is the Renewable Energy Law, which sets out a legally binding development plan for promoting green energy, mandating grid operators to purchase power from renewable sources. The government’s target is that 15 per cent of China’s total electricity output should come from renewable sources by 2020, up from around 5 per cent today.

Over the next 15 years, China plans to invest nearly $200bn in alternative energies. Hydropower will account for half of the spending, but the fastest growing sector is expected to be wind power, which should increase its installed capacity from just one gigawatt last year to 30 gigawatts by 2020. By comparison Germany, the world leader in wind power today, has a wind generation capacity of 18 gigawatts.

While China’s support for alternative energies should be applauded, the policy does not mark a shift away from coal use – far from it. Even if China succeeds in lowering the proportion of coal in its energy mix, booming demand for electricity will still see it burn twice as much coal by 2030 as it does today.

Last year, the country consumed the equivalent of 2.2bn tonnes of coal and emitted more carbon dioxide than the whole of Europe.

Chinese analysts warn that total energy demand may reach 4bn tonnes by 2020, when China will likely be on the verge of overtaking the US as the world’s biggest emitter of greenhouse gases.

The government’s science and technology strategy document for the period 2006-2020 emphasises the importance of investing in efficient coal power stations and “clean coal” technology. Realistically, making cleaner use of its coal deposits is the only way that China might contain the growth of its carbon emissions.

Environmentalists argue that clean coal is a myth: coal remains a dirty fossil fuel, they say, even if it does reduce carbon emissions from conventional burning. But coal, which is abundant in China and by far the cheapest energy source, will remain China’s primary energy source for the foreseeable future.

Indeed, recent feasibility studies into coal-to-liquids (CtL) technology suggest that China is now turning to its vast coal reserves as a source for cheaper oil substitutes. Last year China imported 22.1m tonnes of crude and refined oil. The government is keen to do all it can to keep oil bills down by producing transport fuels domestically.

South Africa’s Sasol Group, the world’s leading producer of coal-to-liquids, has signed agreements to build two large CtL plants at a total cost of $6bn. The plants will together have an annual output of around 8 million tonnes, with projected production costs of just $10 per barrel.

Liquid fuels made indirectly through a gasification process produce a synthetic fuel cleaner than ordinary diesel.

But the risk is that China will adopt direct liquefaction, a much dirtier process that fails to remove many of the pollutants in the fuel. China’s largest coal company, Shenhua Group, is already testing direct CtL technology.

The passage of the Renewable Energy Law shows that the Chinese government, which long considered pollution an issue for developed countries to deal with, is waking up to the scale of the global warming problem. And for investors in renewable energy and carbon traders alike, China may prove a honeypot for years to come.

But don’t be fooled by all the green talk: China remains firmly wedded to the dirty black stuff.

The China Economic Quarterly (CEQ) is an independent newsletter devoted to analysis of the Chinese economy and business environment since 1997. It draws on the 25 years of combined experience of its editors, veteran financial journalists Joe Studwell (author of The China Dream) and Arthur Kroeber, and also publishes articles by leading China-focused economists and journalists. This column appears exclusively on on alternate Mondays.

Copyright The Financial Times Limited 2018. All rights reserved.

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